Fitch Rates Northeast Georgia Health System, Georgia 2005 Bonds 'A'

Business Wire, Sept 1, 2005

NEW YORK -- Fitch Ratings has assigned an underlying 'A' rating to the following issues for the Northeast Georgia Health System, Inc. Project:

Hospital Authority of Hall County (GA)

-- $52 million revenue anticipation certificates, series 2005A;

-- $66 million revenue anticipation certificates , series 2005B.

The series 2005A bonds will be auction-rate securities insured by MBIA, whose insurer financial strength is rated 'AAA' by Fitch. The series 2005B bonds will be variable-rate demand obligations insured by MBIA, with a liquidity facility provided by Citibank. Fitch will provide a short-term rating on the series 2005B bonds at a later date. Bond proceeds will be used to refund the outstanding series 1995 and portions of the outstanding series 1999 bonds. The bonds are expected to sell the week of Sept. 26 through negotiation by Citigroup. In addition, Fitch affirms the 'A' rating on Northeast Georgia Health System's outstanding debt listed below. The Rating Outlook is Stable.

Fitch affirmed Northeast Georgia Health System's (NGHS) rating in July 2005 and was aware of this refunding transaction. Since our rating action, NGHS entered into two forward starting floating to fixed interest rate swaps to lock in a fixed rate for the Series 2005 refunding transaction. The counterparty on both swaps is Citibank. Fitch believes the swaps pose minimal risk to NGHS due to its financial profile. In addition, the swaps were extensively reviewed with outside advisers and the board has adopted a swap policy.

Since Fitch's initial rating in 2001, NGHS has exhibited weakened profitability trends with a 0.7% operating margin in fiscal 2004 and negative 0.3% through the nine months of fiscal 2005 compared to historical profitability ratios of 2-3% operating margins. The decline in operating performance has been attributed to rising expenses namely bad debt and salaries, wages, and benefits. The organization has implemented several cost reduction initiatives including a reduction in workforce and restructuring employee benefits. These initiatives have resulted in $20 million of annual savings. Fitch views this favorably and expects NGHS to return to its historical profitability levels.

The full fiscal 2005 budget includes a 1% operating margin, which management expects to meet due to the receipt of indigent trust funds later in the fiscal year. However, Fitch believes the budget may be unattainable due to additional severance costs for over 60 employees that were terminated in the third quarter of fiscal 2005. However, Fitch expects the fiscal 2006 operating income target of $12 million to be met due to the savings identified in fiscal 2005.

NGHS' credit strengths include its strong liquidity and cash flow margins, investment in its plant, favorable market position, and solid utilization trends. NGHS maintains strong liquidity ratios despite healthy levels of capital investment in its plant with 252 days cash on hand at June 30, 2005. Strong cash flow has led to the sound liquidity position with double digit EBITDA margins that have averaged 14% over the last five years.

Capital investment has averaged 145% of depreciation expense over the last five years, which Fitch views favorably and has led to a young average age of plant of 7.9 years. NGHS has transitioned into a regional referral center with the addition of an open heart program in 2002, which has exceeded original volume projections. The open heart program was funded with the series 2001 bond issuance and the project was on time and on budget.

Open heart cases totaled 565 in fiscal 2004. NGHS maintains the leading market position in its total service area with 36% market share in 2004 up from 35% in 2001. In addition, this is five times the market share of the next closest competitor, Gwinnett Medical Center with 7.2% in 2004. Due to the solid population growth, utilization trends have been favorable with an increase in discharges of 7% and 4%, respectively in fiscal 2003 and 2004 and an increase in outpatient surgeries of 7% and 6% respectively over the same time period.

Credit concerns include future capital needs and rising bad debt expense. Due to the strong growth in NGHS' service area, the organization is considering two significant expansion projects. NGHS has already received a certificate of need for an additional 96 beds at its main campus. In addition, the organization may potentially add inpatient capacity in South Hall County, which is one of the fastest growing counties in its service area. The capital plan for FY 2006-2010 totals $340 million and additional debt is expected in 2007.

Fitch will evaluate the effect the additional debt will have on NGHS' rating at the time of issuance. Despite the recent pressures on operating performance, debt service coverage has remained sound averaging 2.8x over the last three fiscal years and was 3.0x through the nine months ended June 30, 2005. Bad debt expense has increased significantly to $29 million in fiscal 2004 from $17 million in fiscal 2002.